International Business : Shortages Among Coffee-Growing Nations Drive Prices Higher : Commodities: The collapse of a 1989 international trade accord has been exacerbated by woeful harvests.
Like someone who’s had too many cups, world coffee markets are wired these days with the price of beans rocketing higher, thanks to worsening shortages in Colombia, Brazil and the other big coffee-producing nations.
The commodity price of whole, unroasted beans has roughly doubled since last summer, with the latest surge occurring in the past week. And coffee experts say prices could double again before it’s over.
The dramatic rise--which was predicted long ago by coffee-growing nations as the inevitable result of the collapse of an international cartel in 1989--is described as a cyclical response to the low prices that prevailed just a year ago.
When prices tumble as they did steadily from 1989 to 1993, growers save money by skimping on fertilizers and other agricultural practices, opening the door to crop disease and infestations that can slash the size of crops for years. Shortages follow, bidding prices back up.
That and this season’s late Indonesian harvest had more to do with the surge in prices than did a recent scheme by 28 coffee-growing nations to withhold beans from the market, said Judith Ganes, a coffee analyst at Merrill Lynch in New York.
As production fell and consumption remained flat, estimated stockpiles have tumbled by half, Ganes said, triggering a classic supply-demand reaction in prices.
As recently as last July, the average world price of a pound of green, or unroasted, coffee beans stood at 52 cents. On Wednesday, the price stood at $1.28 a pound. Ganes predicted that the price will exceed $2 within four months.
“What matters right now is there aren’t enough beans, and the growers won’t be able to recoup before 1995 or 1996,” Ganes said. “I think the bull market is just starting.”
Though good news for those members of the lately toothless coffee growers’ cartel that have beans to sell, it spells trouble for coffee’s “Big Three”--Procter & Gamble, Kraft/General Foods and Nestle--as they struggle to hold the line on retail prices and limit the further loss of customers to pricey, higher- quality gourmet blends.
There was little impact at the supermarket level until this week, when General Foods, which distributes the Maxwell House brand, raised its price to grocers by 25% to about $2.50 for a regular can. That is sure to cause a spike in retail prices and risk a further loss of market share, said Tom Pirko, president of Santa Barbara-based Bevmark Inc., an international beverage consulting firm.
Pirko said the high-volume roasters--purveyors of such name brands as Folger’s and Maxwell House--are plagued by razor-thin profit margins. Until now they have held the line on prices to hang on to customers who might otherwise opt for the gourmet coffees.
Now that the makers of the cheaper canned coffees have started to boost retail prices to avoid losses, Pirko said, the trendy gourmet firms typified by Seattle-based Starbucks could grab still more market share by keeping current prices and forgoing some of the generous profit margins they now enjoy.
“The question is, are they smart enough to know that?” Pirko said. “Their margins are enormous. They could absorb much bigger (green bean price) increases than we’ve seen so far.”
Today’s volatility has its roots in the 1989 breakup of the International Coffee Agreement, a pact among 50 producing countries and 21 consuming nations, including the United States. The agreement set export quotas aimed at keeping prices stable.
U.S. support of the agreement stemmed from coffee’s importance to the economies of dozens of nations, including about 25 million jobs in Brazil, Colombia, Kenya and Indonesia. Of particular concern was Colombia, where the United States favored the bolstering of a farm export that might otherwise be replaced by illegal plantings of marijuana and cocaine.
But the nations couldn’t agree on further quotas, and the breakup of the pact sent world prices into a tailspin and cut deeply into revenues of the coffee-growing nations. Repeated efforts to reach a new agreement have failed.
Last July, the 28 biggest producing nations, excluding Mexico, declared an agreement to begin withholding 20% of their exports as of Oct. 1, and prices began to climb.
But despite today’s claims of success by Brazilian and Colombian coffee negotiators, most outside experts say prices were destined to surge even without the so-called retention scheme. The proof lies in the continuing rise since the program, having already exceeded its price targets, was called off in April.
Meanwhile, the biggest coffee importer, the United States, last year dropped its support of any coffee quota system, making such export controls difficult to maintain. The coffee cartel needs the cooperation of consuming nations to keep the exporters honest by monitoring the flow of imports.
Whatever the cause, the surge in prices is especially welcome in Colombia, the No. 2 producer, where trees have been hard hit by disease. Coffee production fell from 17 million bags to 13.6 million in the past year. About 150,000 acres of coffee trees were eradicated to make room for more profitable crops, such as fruits.
As with all commodities that consumers can get along without, there will be a self-correction, even if some people are willing to pay $6 to $9 for a pound of coffee.
Indeed, as steep as the recent price hike has been, today’s levels, unadjusted for inflation, merely return prices to the $1-to-$1.50 range that prevailed during most of the 1980s. A price spike to $2 at the start of 1986 was short-lived.
Economist Fred Gray of the U.S. Agriculture Department’s Foreign Agricultural Service said: “Coffee’s not an absolute necessity. If prices get too high, people will switch to tea or something else.”
